Loan origination is a crucial stage of the lending process. Every aspiring borrower goes through the process of obtaining a loan. It is a multi-step process starting from loan application to funding disbursal. The steps involved may differ from institution to institution, in addition to other factors such as loan type and lender policies. These are often monotonous, repetitive, and mundane. That is why most finance companies consider loan origination outsourcing to focus on other important aspects of their business.
Below are the many steps involved in the overall loan origination process followed by lending companies to save time and money and make the process more effective:
1. Pre-Approval
Pre-approval is the first step in loan origination. The applicant provides information about their identity, residence, employment, income, tax returns, expenses, payment history, and loan requirements. Based on this information, the loan provider pre-approves the loan and allows the borrower to continue.
2. Documentation
The borrowers must complete the application process and submit the relevant documents to validate their employment, income, finances, and other credentials. Depending on the lender policy, applicants can submit the documents offline or online. Once received, the loan company has to study these documents to verify details and evaluate credibility.
3. Credit Check
Every business and individual has a credit score based on their past credit habits. Loan companies check this score to establish the creditworthiness of applicants based on their credit history and behavior with previous lenders. Credit bureaus use unique scoring systems and proprietary algorithms to assess the credibility of applicants.
A high credit score above 750 increases the chances of getting approval at favorable loan terms and conditions. It also gives higher leverage to borrowers while negotiating loan terms and seeking high-value loans.
When a loan company receives a loan application, the outsourcing service providers check the applicant’s credit history to determine the risk involved in lending to them. They procure the credit report to see how the applicant has previously handled credit.
4. Loan Processing
Once the loan company receives a loan application, it reviews its details and ensures it is complete and accurate. If it has any discrepancy or error or some additional information is necessary, the credit department contacts the applicant to procure the same. Lenders often hire loan origination outsourcing services to assess the applications and request missing fields from aspiring borrowers.
5. Underwriting
The underwriting process is crucial for loan approvals. The lenders evaluate applications against various parameters such as risk score, credit score, DTI ratio, and repayment capacity. Some loan companies also check the applicant’s digital footprints. Outsourcing service providers follow specific underwriting guidelines charted out by the lender to complete the process.
6. Credit Decision-Making
Based on the results achieved after underwriting, the loan providers approve or decline the application or send it back to the originator for collecting additional information. Changes in the loan parameters like the loan amount, tenure, or interest rates can encourage lenders to reconsider a rejected application.
7. Quality Check
Loan providers have tightly regulated consumer lending procedures that require finance companies to maintain specific standards for cash reserve ratio, KYC normal, credit ceiling, and capital adequacy. A quality check is crucial in the loan origination process.
Loan origination outsourcing companies receive loan applications to ensure quality control and audit to ascertain complete compliance with external and internal regulations. It is the last step for application review before fund disbursal, helping loan companies avoid disciplinary action or lawsuits during a dispute.
8. Funds Disbursal
Most loan companies disburse the approved funds after both parties sign the loan documents. The loan company issues a demand draft or check that the borrower can collect from the lender’s branch or get delivered through courier. Some modern NBFCs may credit the loan amount directly into the applicant’s bank account via NEFT.
Loan companies widely increase their productivity and efficiency by outsourcing their loan origination procedures. Finance companies desperately require external support and flexibility to face stiff competition from technologically-advanced competitors.
Lenders use advanced methods in their origination procedures to meet changing consumer demands and process loans more efficiently while meeting stringent regulatory norms.
Loan origination outsourcing ensures increased efficiency and accuracy, and faster decision-making. While the origination process presents several challenges, outsourcing builds brand image and gains an edge over competitors.